Surety Bonds

Why in news?

• New India Assurance, the largest non-life insurance company of the country, on Friday announced the launch of its surety bond business.

What is Surety Bonds?

• Surety bond can be said as a promise to be liable for the debt, default, or failure of someone else.
• It is a three-party contract in which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee).

How Surety Bonds will work?

• A surety bond is provided by the insurance company on behalf of the contractor to the entity, which is awarding the project.
• When a principal breaks a bond’s terms, the harmed party can make a claim on the bond to recover losses.
• It can effectively replace the system of bank guarantee, issued by banks for projects, and help reduce risks due to cost overrun, project delays and poor contract performance.

PRACTICE QUESTION:

Consider the following statements regarding ‘Surety Bonds’:

1. It can effectively replace the system of bank guarantee, issued by banks for projects.

2. It cannot issued for road contracts in India

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer